Personal Loan Hacks: Lower your EMI by following these simple tips

Whether for children’s education or for wedding expenses, personal loans are very helpful when there is a cash crunch. It provides easy access to cash without the need to pledge collateral. The lack of collateral also makes a personal loan the go-to option when emergency funds are required.

However, a lot of people do not consider their options while borrowing and end up paying very high instalments, when actually they can lower their EMI and reduce their monthly burden by follow very simple hacks. Here are some ways by which personal loan EMIs can be reduced —

1. Pay a sizeable amount as down payment

Down payment is a sum that borrowers pay when buying a specific product. A hack to lower EMI here would be to pay the maximum amount as down payment, which would help in lowering the amount borrowed and lead to lesser EMI.

To put things into perspective, if an individual borrows an amount of Rs 10 lakhs, at an interest rate of 11 per cent, for a tenure of 10 years, and pays 15 per cent down payment with 3 per cent processing fees, the EMI amount comes to Rs 11,708.75.

Whereas, by simply increasing the down payment amount, while keeping other vales constant, the EMI amount decreases to Rs 9,642.50. You also end up paying less interest to the bank.

Cost of Asset Loan Amount (Rs) Interest Rate (%) Down payment (Rs) Processing fees (Rs) EMI (Rs) Cash Needed (DP + PF) (Rs) Total interest paid (Rs)
Rs 10,00,000 8,50,000 11 1,50,000 25,500 11,469.47 1,75,500 15,51,836.4
Rs 10,00,001 8,50,000 11 3,00,000 21,000 9,642.50 3,21,000 14,78,100

2. Longer the Tenure, smaller the EMI amount

Personal loan amount has an inverse relation with loan period. The longer the loan tenure the smaller will be the EMI as the amount gets divided into a longer duration. But here borrowers might have to pay more in interest with a longer-term loan. If one wants to save money on interest, one should opt for a shorter term with higher EMIs.

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3. Opt for a step-down EMI plan

In a step-down EMI plan, the borrower’s EMI payments are reduced annually throughout the loan. In this plan, a substantial portion of the principal borrowed as well as the interest component of the loan must be repaid in the first few years of the repayment period. However, the EMIs reduce as the loan term elongates. By significantly lowering the principal, a step-down EMI option lessens the burden of loan repayment. As it enables individuals to repay the loan while they still have active income sources, this option is best for people who are close to retiring.

4. Part prepayment

Prepayment is an option given by most lenders after the borrower pays a substantial amount of loan, usually after 12 EMI repayments. In this process, borrowers make the payment of a substantial part of the loan that is deducted from the outstanding principal balance. When the outstanding principal amount reduces, so does the interest amount, resulting in a lower EMI. By choosing a partial prepayment, one may lower the loan term as well as lower EMIs while also becoming debt-free sooner.

One thing to keep in mind is that some lenders charge a certain fee on the prepayment of a loan.

5. Balance Bank Transfer

Balance Bank Transfer facilitates borrowers to transfer their outstanding loan amount to a new lender. Besides transferring the loan, the borrower can get a lower interest rate and an extended loan repayment tenure, which collectively results in a reduced EMI. However, if one chooses to avail of this facility, remember to compute the costs associated with loan processing fees and loan foreclosure charges, and not just consider the lower interest rate offered by the new lender

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